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HSBC takes over the Chinese real estate market and warns of a wealth slump

The outlook tarnishes otherwise positive fourth-quarter earnings, as profit more than doubles and targets are increased.

HSBC set aside $451 million as it braces for more defaults in China's troubled real estate sector and warns of a wealth management slowdown due to Hong Kong's restrictive "zero Covid" strategy, marring otherwise positive fourth-quarter earnings.

The bank has made wealth management a key part of its "pivot to Asia" strategy, promising to invest $6 billion and hire thousands of advisers in the region. However, China's efforts to eradicate the coronavirus have stalled because Hong Kong's borders are still closed and many of its branches are closed.

"The market [has] slowed down as a consequence of market declines and restrictions in Hong Kong, but we expect that to have a temporary impact," Noel Quinn, the company's chief executive, said in an interview on Tuesday. Despite this, the impact has persisted into the first quarter, "which is traditionally the strongest," he said.

Headwinds in its most important market overshadowed a more upbeat set of results, indicating that the London-based lender is recovering from the worst of the pandemic and remains optimistic about future growth as interest rates rise.

Pre-tax profits nearly doubled to $2.7 billion in the fourth quarter, meeting analyst expectations. Higher commercial and retail earnings, particularly strong growth in British mortgages, more than offset declines in wealth management.

A further release of $276 million in Covid-related loan-loss provisions in the UK and Europe also boosted earnings. In comparison to the same period a year ago, group revenue increased by 2% to $12 billion.

When an existing $2 billion stock buyback program was completed, HSBC increased its dividend and announced it would buy back another $1 billion of stock. It also stated that it expects to achieve its profitability goal of 10% return on tangible equity in 2023, a year earlier than expected.

This is largely due to the anticipated windfall from higher interest rates. With a $700 billion global deposit surplus, chief financial officer Ewen Stevenson estimated that a 1% increase in rates would generate an extra $5 billion in net interest income each year.

Quinn stated that the rate outlook has become "significantly more positive." "After absorbing the impact of low interest rates for some time, we believe we have turned the corner," he said.

"HSBC earnings were not as bad as feared," said Yafei Tian of Citigroup. "Investors might be incrementally concerned with the impact of Hong Kong macro slowdown to the top-line."

Following the announcement, the stock fell 1% after recovering 25% in the previous year. Lockdowns and tensions between the US and China drove the stock to a 25-year low in September 2020.

Late last year, China's real estate sector was still reeling from the collapse of property development behemoth Evergrande, which was buried under a $300 billion debt load. It has exacerbated crises at competitors, who have struggled to refinance their debts in the face of a government crackdown on borrowing and a loss of market confidence.

"The change in policy measures created a significant amount of uncertainty, leading to liquidity and refinance risk for clients," Quinn said. On its $21 billion mainland China exposure, "We thought it wise to reflect the increased level of uncertainty and create some modelled impairments."

The company's Asian wealth business, according to the CEO, will have a "weaker" start to the year. While Asia wealth's net new invested assets more than doubled to $36 billion in 2021, revenues fell slightly in the fourth quarter.

Hong Kong is fighting a major coronavirus outbreak, with more infections in the last month than in the previous two years.

Hong Kong accounts for a third of HSBC's global customer accounts and generates about a third of the bank's profits.

"Restrictions in Hong Kong, including travel, public gathering and social distancing, are impacting the Hong Kong economy, and may affect the ability to attract and retain staff," the bank said in its annual report.

HSBC, like many of its competitors, has been forced to close nearly half of its Hong Kong branches.

Last week, Standard Chartered CEO Bill Winters warned that the longer China maintains its zero-Covid policy, the harder it will be for Hong Kong to maintain its dominant position as Asia's top financial center.

"Hong Kong has a record of bouncing back," Quinn said, adding that the bank's Asia strategy was still very important to him. "The slowdown in wealth is temporary — wealth creation in Asia is a huge opportunity that we should still pursue."

The investment bank of HSBC increased revenue by 1% in the fourth quarter as income from advisory and capital markets increased by 7%, offsetting a 2% drop in trading revenue.

However, pre-tax profit fell 41% as costs increased significantly, owing largely to a 31% increase in the bonus pool to $3.5 billion, following a 20% drop in 2020. "a significant repricing of investment banking talent [in the US] . . . we are trying to be competitive," Stevenson said.

Pre-tax profits increased 115 percent to $18.9 billion in 2021, just missing forecasts of $19.1 billion. Annual revenue fell 2% to $49.6 billion.

That's a big change from 2020, when the bank's bad debt provisions topped $8 billion at the height of the lockdowns, slashing annual profit by 45 percent to $12.1 billion.



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